THE LINEAR PROCUREMENT
PROCESS MODEL
Alignment with business needs
Business needs and requirements are the input for
the linear procurement process model. These
needs and requirements may be defined in a more
general way, or in a very detailed manner.
Let’s look at the following example. Some years
ago, a manufacturer of high-tech modules decided
to enter the aerospace business to obtain work
with a higher value added and a better margin.
More specifically, the manufacturer targeted the
design and manufacturing of specialized solar
panels for future spacecraft. Since technical
requirements are very high in the aerospace
industry, the company needed to invest in a high
precision milling machine.
New-task situation, modified rebuy and straight rebuy illustrated
by some examples
Step 1) The specification phase
• During this first stage of the procurement
process, the requirements are determined and
the company is also faced with the ‘make-or-
buy’ question.
• It has to determine which products or activities
will be produced, i.e. performed by the
company itself, and which products or
activities will be contracted out.
• In general, procurement managers differentiate
between functional specifications and
technical specifications.
Step 1) The specification phase
Purchase (order) specification
Step 2) Supplier selection and
supplier assessment
• In practice, the step of ‘selection’ contains three
steps:
• (1) preliminary qualification of suppliers and
drawing up the ‘bidders’ list’;
• (2) preparation of the request for quotation and
analysis of the bids received; and
• (3) selection of the supplier. Each of these
activities is briefly described next.
Step 2) Supplier selection and supplier
assessment (preliminary qualification )
Step 2) Supplier selection and
supplier assessment (RFQ & P)
Step 2) Supplier selection and
supplier assessment (Tender)
Step 2) Supplier selection and
supplier assessment (TCO)
Step 2) Supplier selection and
supplier assessment (Supplier
Selection)
Step 3) Negotiation and
contracting
• After the supplier has been selected, a contract will have to be drawn
up.
• Depending on the industry, the contract may refer to specific
additional terms and conditions.
• Specific commercial and legal terms and conditions will vary per
contract, differences being caused by, for example, procurement
policy, company culture, market situation or product characteristics.
Step 3) Negotiation and
contracting PRICES AND TERMS OF DELIVERY
• In general, the buyer should
insist on a fixed price, arrived
at through competitive
bidding or negotiation, which
is acceptable to both buyer
and supplier.
Step 3) Negotiation and
contracting TERMS OF PAYMENT
• In most procurement transactions, a buyer receives the goods and
services first and has a specified period (e.g. 30, 60, 90 or 120 days)
to pay the invoice later. While most suppliers would prefer to
receive prompt payments.
• When capital goods or installations are purchased, it is common
practice for payment to take place in several stages, i.e. milestones.
Step 3) Negotiation and
contracting TERMS OF PAYMENT
Step 3) Negotiation and contracting
PENALTY CLAUSES AND WARRANTY CONDITIONS
• Penalty clauses and warranty conditions are terms in purchase
agreements ensuring that suppliers deliver goods that meet specified
quality and performance standards.
• Example:
• Warranty Condition: "The supplier guarantees that all delivered
machinery will be brand new, comply with specified performance
standards, and be free of manufacturing defects for a period of 12
months."
• Penalty Clause: "If the machinery is found defective within the warranty
period, the supplier will replace the machinery at no cost, or a penalty
fee of $5,000 will be deducted from the next payment
Step 4) The ordering process
Step 5) The expediting process
• The expediting process in procurement involves closely
monitoring the delivery of materials to prevent delays in
operations.
• There are three main expediting methods:
• exception expediting, where the buyer reacts to late deliveries
after being informed by internal customers;
• routine status checks, where the buyer confirms delivery dates
shortly before expected arrival to avoid last-minute issues; and
• advanced status checks, used for critical suppliers and
components, which involves regular progress checks and may
include field expediting where inspectors visit the supplier's site
for high-risk contracts.
Step 6) Follow-up and
evaluation